Analysts have cut their estimates for S&P500 earnings growth for Q1 due to concerns over tariffs, inflation and AI disruption. That’s according to the latest research from FactSet’s senior earnings analyst John Butters.
Before investors start wailing and gnashing their teeth, however, it’s worth noting this is all part of the forecasting process. According to FactSet, analysts have downgraded their Q1 growth estimates every year since 2021.
Are more downgrades coming?
In January and February, analysts lowered their EPS forecasts for the S&P 500 by -1.5% from $71.57 to $70.50. Since 2021, the average decline has been -3.1% but it was -5.5% in Q1 2023 and -3.6% last year.
Therefore, on the surface, this year’s downgrade is nothing to worry about. However, it came before this week’s attack on Iran and soaring energy prices, so further cuts are highly likely.
So far this quarter, the biggest cuts to forecasts have been in Energy (-12.3%) and Healthcare (-13.2%). At the other end of the scale, IT earnings have been revised up by 5.2% despite the ‘Saas-maggedon’ scare.
Historically, analysts have also cut their Q2 EPS forecasts for the S&P 500 in April and May. Last year they lowered their Q2 estimates by 4%, but the net result was more companies beat the consensus.
FY forecasts still creeping up
Over the past year, the average FY26 EPS forecast has crept up just over $2 to $313.25. That may not seem much, but it would mean year-on-year growth of around 17% which would be quite a feat.
IT earnings estimates have been raised by 4.1%, while Communication Services estimates are up 2.9%. Once again, Energy and Healthcare forecasts have been cut the most, by 6.5% and 2.3% respectively.
For Q4 2025, FactSet calculates 73% of companies beat EPS estimates, while the average earnings increase was 14%. IT earnings grew the fastest at 33%, and AI was mentioned at least once on 321 company conference calls.
Analysts typically get more bullish as the year goes on, so they start by cutting forecasts and end by raising them. To that extext, the latest Q1 cuts are nothing to worry about, nor are the Q2 cuts.
However, the attack on Iran has completely shifted the goalposts for earnings. Where Energy forecasts have been cut, presumably they will be raised again as oil and gas prices have soared.
Offsetting this, maybe, could be cuts to Manufacturing and Retail if the US and global economy slows down. Moreover, companies which benefitted from a weak dollar might see sales crimped as the greenback stregthens again.
We will check back in the coming weeks to see if analysts have become more bearish. Given the US market is on a high valuation, it needs to sustain a high level of earnings growth to justify its rating.
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